What is a swap order?

An order to a broker to buy a security and sell the same security, but only if the broker can achieve a certain price differential. For example, an investor may make a swap order to buy a certain number of shares of Stock X and sell the same number of shares, but only if the broker can sell them at $1 more per share.

How does a swap work?

A swap is a derivative contract through which two parties exchange the cash flows or liabilities from two different financial instruments. Most swaps involve cash flows based on a notional principal amount such as a loan or bond, although the instrument can be almost anything. Usually, the principal does not change hands.

What are the different types of swaps?

The most common kind of swap is an interest rate swap. Swaps do not trade on exchanges, and retail investors do not generally engage in swaps. Rather, swaps are over-the-counter (OTC) contracts primarily between businesses or financial institutions that are customized to the needs of both parties.

What is a commodity swap?

Commodity swaps involve the exchange of a floating commodity price, such as the Brent Crude oil spot price, for a set price over an agreed-upon period. As this example suggests, commodity swaps most commonly involve crude oil.